Higher Current Account (C/A) deficit and substantial borrowing of the government sector to finance the deficit has once again raised the demand for money. This is reflected from the secondary market T-bill yields which are currently at 12.08 per cent, surpassing the DR (Discount Rate) of 12 per cent.
Last time market witnessed such a pattern was on November 6, 2008, where T-bill yields surged to 13.45 per cent compared to the policy rate of 13.0 per cent. Following this, the SBP raised the DR by 200bps to 15 per cent on November 12, 2008. So does this mean that the market is pricing in the DR hike? ‘Our answer is No! However, the market is expecting a huge bailout from the Central Bank,’ said Muzzammil Aslam and Furqan Ayub at JS. So far, SBP has sponsored money shortfall through consistent Open Market Operation Injections (current outstanding Rs262 billion) which, analysts said, in our view, is not sustainable or a viable option, even in the short-term. We believe, it has to be replaced with either SBP printing money or retirement of government’s huge debt balances to banking companies, they added.
M2 grow merely at 2.92 per cent from July to Dec 9: Due to the surge in C/A deficit, the money supply has witnessed a meager growth of 2.92 per cent versus 6.18 per cent last year. Net Foreign Asset (NFA) contracted by Rs117 billion versus an expansion of Rs72 billion during the same period last year. However, the Net Domestic Asset (NDA) has increased by Rs318 billion versus Rs285 billion last year. It is interesting to note that the government borrowing for budgetary support has actually increased by Rs719 billion versus Rs371 billion last year.
The difference between NDA and budgetary borrowing stands at a net retirement of Rs274 billion by Public Sector Enterprises (PSEs). For this, government (in order to ease off the burden on energy companies), has converted PSEs debt into T-bills and PIBs, which has further deteriorated the banking sector’s advance to deposits and in turn strengthen investments to deposits. This has resulted in banking sector straying away from its original role of being an intermediary and facilitator to the private sector.
T-bill yield higher than the DR: Analysts believe that the money growth of 2.92 per cent is not enough to offset the impact of inflation (expected to be around 12 per cent in FY12). In addition, government’s persistent failure to mobilise resources has increased the demand for money. Hence, T-bill yield has officially surpassed the DR rate (first time since November 2008). Recall, SBP has aggressively eased its policy stance by 200 bps to 12 per cent in FY12 so far. One year T-bill yields which were at 13.68 per cent on January 1, 2011, touched a year low of 11.76 per cent on November 2, 2011. Since then the yields have bounced back to 12.10 per cent as of yesterday. A similar pattern has been witnessed in PIBs as well.
Is the market pricing in
another hike in the DR? We believe the current situation is quite different when compared to 2008, they said, adding that today the country is engulfed with fiscal crisis which is the outcome of lower savings and higher government expenditures. However, in 2008 the crisis emanated from balance of payment risk, which led to fast depletion of foreign reserves and in turn huge NFA contraction. Furthermore, the government was aggressively printing money to subsidise the higher oil prices in 2008. Therefore, we believe the risk of further hike in DR is not on the cards but if government fails to address its lower saving issue then we are not far from a further hike in DR, they added.
